How blockchain helps in assessing credit risks and debt control? Over the years, the digital currencies have played a vital role in making faster and safer payments and empowering the expansion and development of the FinTech industry.
In the process, it has also pushed the widespread adoption of digital assets to make a transaction.
It is all due to the blockchain technology that underlies it.
Blockchain technology, in fact, came into the spotlight and took the center stage with the introduction of digital currencies such as Bitcoin and Ethereum, and a host of others following them, all of which facilitated the growth of FinTech.
With all its useful traits, blockchain technology has found a solid foothold in several industries such as manufacturing, transport, supply chain and more, for different purposes.
Therefore, the role of blockchain typically is to help the industries to stay ahead as well as facilitate safe and secure transfer of money making the best use of the digital landscape.
According to a few recent estimates, billions and billions of digital transactions are made today all across the globe and it is worth a couple of quadrillion dollars.
If you did not know, blockchain technology also plays a crucial role in the credit risk assessment and helps in debt control as well.
This article will let you know all about credit risk assessment and debt control based on the proof of concept and its modeling, design and journey.
You will also know about the Distributed Ledger Technology with respect to conventional lending processes and different ways and benefits of debt control.
How Blockchain Helps in Assessing Credit Risks and Debt Control?
The traditional lending and borrowing process as you are familiar with has changed completely with the use of blockchain technology.
This innovative technology has enhanced the trust, security and efficiency quotient of the process and has also increased transparency and accuracy in maintaining the records.
All data related to financial transactions are available for all to see due to the Distributed ledger Technology which helps in credit risk assessment.
The blockchain technology is capable of handling large amounts of digital transactions and the safety and security factors are well maintained by the technology which creates a more convenient and reliable digital landscape.
Most of the FinTech companies today rely on blockchain technology apart from a host of others.
It helps them to maintain immutable records which can be viewed by all those who need it at any point of time and from any place they may be.
However, not very long ago, the scenario was completely different.
With the absence of blockchain technology then, lending and borrowing of money was done only through traditional financial institutions.
This means that the third parties and the intermediaries managed the entire credit process.
This led to confusions, errors, and even manipulation of data which did not allow proper credit assessment and debt control.
Creation of the layer of protection and trust was primarily done by these intermediaries and third parties in exchange for high fees.
It is needless to say, these were often not foolproof.
Apart from that, there were a lot of regulations and other layers of complexities that not only made the process pretty long-drawn and cumbersome requiring a lot of paperwork but also deterred the people from lower income groups from accessing safe credits.
This is where blockchain has come to their rescue and made the process easier, faster, safer, and more accessible to all.
People can track their money and assess their financial health, manage debt in a much better way, and assess credit risk in a much better and convenient way than ever.
The technology helped in making direct transfer of funds or any other type of digital assets from one person to another.
Since the process facilitated peer to peer lending, it eliminated the need for an intermediary or a third party to oversee the process.
It is all due to the nature of blockchain, the design, and the unbiased and decentralized nature of the technology.
In fact, all these features helped the blockchain technology in creating new heights in the borrowing and lending of funds as well as assessment and management of credit.
Fruition of Conventional Lending Process
The traditional lending process was and is still good but it needs to evolve for its fruition and provide the benefits to all, irrespective of their income group.
However, that is not the case.
On the contrary, the traditional lending and borrowing process created gaps in the process.
This is typically due to the inability of the traditional financial system to assess the credit more effectively.
Moreover, the traditional lending process involves a lot of tedious paperwork and other tasks related to documentation and evaluation that consume a lot of time resulting in a long wait period for the consumers.
It is these downsides of the traditional lending process that the modern lending and borrowing firms wanted to cash on.
Therefore, in order to prop up financial inclusion, these firms started to leverage blockchain technology.
This innovative approach gave them and their lending process the much-desired agility to complete a transaction as well as the ability to use alternate data points.
This means that these modern digital lending platforms can now offer instant personal loans to both the salaried individuals as well as the self-employed.
The credit evaluation process is fast and almost foolproof because these firms follow a tech-based approach in almost every aspect which include and are not limited to:
- Evaluating the credit of a person
- Estimating the risks involved in making a loan and
- Processing and approving such loan requests.
And, the best part of the modern lending firms is that everything from verifying the eligibility of the potential borrower whether it is apt with the application to the disbursement of loan and even its repayment is done online.
This expedites the entire process.
Therefore, the traditional lending and borrowing process also needs to follow the footsteps of these modern lending platforms and stimulate advanced technologies, such as blockchain technology, for their fruition.
This will help them to make the entire process much more refined, safer, faster, and reliable.
With several types of blockchain apps available right now, the customers will find it very helpful and easy to access the credit solutions offered directly by using their smartphones if these apps are integrated into the process.
The customers will be able to link these apps to their bank accounts and it will not need them to visit any branch physically, or go through an intermediary, or even require undergoing long and tedious paperwork to avail a loan.
The good thing about utilizing this approach is that the traditional lending platforms will be able to make their offers to even those people who are seeking a loan for the first time.
What’s more, it will also allow the platforms to serve the gig workers as well who typically do not have a proper and regular income, or the freelancers and the part-timers.
This is done by exploiting alternate lending data points in addition to bureau scores and salary.
Now, looking beyond loan approval and disbursals to assess and manage credit risks, the use of blockchain technology will also help the traditional lending platforms and the modern ones in the collection process.
They will be able to use more advanced and tech-enabled collection practices that will ensure better debt control.
There are several advanced techniques that the lending platforms may use for that matter which include and are not limited to use or automation and robotics apart from the old-school calling agents.
They will also be able to choose one specific opening from a lot of different options to use for smoother and better collection to ensure proper debt control.
All these will immensely improve and expand the reach of the traditional lending platforms and will also ensure better risk assessment.
As a result it will ensure the fruition of the conventional lending platforms and systems.
Credit Risk Modeling and Distributed Ledger Technology
The use of the innovative blockchain technology which is ideally a Distributed Ledger Technology allows creating a better credit risk modeling.
It also plays a significant role in assuaging the challenges faced by the traditional lending platforms and processes.
This is because this technology typically helps in the verification of the identities of the borrowers as well as in estimating the eligibility of them for getting a particular loan and repaying it.
It is the Distributed Ledger Technology that decentralizes the process and ensures the safety and security of the data of the consumers.
In simple words, this technology stores the data of the customers in a distributed ledger instead of a centralized storage.
This allows easy access to the data by all those who need to assess the credit risk and at the same time it also reduces the chances of cyber crime and other online risks.
Based on the infrastructure of the blockchain, the lending platforms get a lot of help while profiling the customers.
It is not only accurate but it is also very secure and private.
Moreover, every participant in the network can access the information of the customer and study the records of the transactions from time to time without affecting the privacy of the consumers.
This helps in management of credit and debt control.
In addition to that, the technology of this distributed ledger ensures that no one can copy or duplicate the records.
Furthermore, the blockchain technology is based on immutability.
This means that none of the participants in the network can tamper with the records of the transaction unless the person gains absolute control of the entire distributed ledger.
Therefore, this ensures a better maintenance of records and at the same time reduces the time and the cost involved in the process.
However, if by any chance an error occurs at the time of maintaining the record, it will be required to add it to error reversibility.
This stays visible.
Therefore, using Distributed Ledger Technology in credit assessment and modeling is pretty safe and foolproof.
Gaining Control over Debts
You can have absolute control over your debts by using blockchain technology, or a blockchain proof of concept, to be more precise.
This is a specific type of concept that will allow you to regain control of your finances.
It is often seen that people do not have substantial knowledge about finance and debt and, as a result, often make wrong financial decisions.
As a consequence, they are pushed to the path of debt and subsequently in a debt hole from which it is hard to come out.
Therefore, if you do not have a clear understanding of your present financial conditions, you will end up making poor, ill-timed, and irresponsible decisions.
Such types of immature behaviors will put you in higher levels of debt.
Some of these irrational and wrong financial decisions and behaviors include and are not limited to:
- Making wrong purchases at the wrong time
- Paying your utility and other monthly bills late and
- Failing to pay your creditors at all.
These reckless behaviors will inevitably increase the amount of money you owe due to accrued interests on them.
This will call for collections activities and may even take away your sleep and mental peace.
Therefore, if you do not want to put yourself in the vicious debt hole, you will need to gain control over your debts.
You can achieve this through a large variety of services which include and are not restricted to:
- Debt assistance
- Debt counseling
- Debt prevention
- Income management
- Budgeting and
- Social lending
There are lots of different institutions out there that will help you out in this process of debt control.
Ideally, financial institutions have a heavy administrative workload and struggle under it.
Creditors typically communicate regularly and only with the debtors rather than with the credit bank.
As a result, the debt relief officers need to spend a considerable amount of time updating a lot of data related to different aspects such as payments, incomes and expenses of the different parties and coordinating between them.
It would have been very nice and more productive if these debt relief officers needed to spend much less time on doing the administrative tasks and spend much more time on coaching the debtors.
This would have helped the debtors a lot in making much better and more informed and educated financial decisions.
It is this particular principle that is underpinned with an innovative approach by using blockchain technology.
This technology and approach helps the debtors to avail several debt relief services.
Proof of Concept
There is no doubt that blockchain is a rapidly emerging technology. This technology allows adding only that data that is agreed upon before it is stored, almost in real time.
This data is also updated, validated and confirmed before inclusion. And, all these things happen on a secured distributed ledger.
In addition to that, the technology also allows accessing this data by a large number of authorized participants of the network from anywhere and anytime.
It is this particular aspect of blockchain technology that makes it an ideal technology to be used in those settings especially where there are multiple parties involved.
The unique blockchain technology makes it easier for them to exchange data and information among them securely and reliably and at the same time ensure that the privacy of each party is maintained.
All these make the blockchain technology a relevant and useful tool to be used in the debt relief ecosystem.
All relevant data will be refined when this technology is used to reap the maximum benefit from it.
It will help in creating a proof of concept that will store all the changes in the financial status of a debtor in a private blockchain.
In addition to that, it will also store all the necessary info related to the income, payment, and invoices of the external partners.
Design and Journey
Using blockchain technology for credit risk management and debt control seems to be a collaborative journey when it comes to developing a project based on this concept.
It needs a very close cooperation between the lending platforms or creditors and debtors to set the right stage for success of the debt ecosystem based on the innovative blockchain technology.
The design should be fully functional with a better architecture and security.
It is required to ensure that the creation and development of the system is compatible with the cloud environment because this is the particular type of setting in which the proof of concept would typically operate.
The design should also ensure that there is enough scope for a joint analysis along with an agile approach that will eventually help in designing the proof of concept.
Therefore, a lot of focus should be given in the design and development of the application with blockchain technology so that it truly adds a new dimension and height of complexity to the app.
However, considering the comparative infancy of this blockchain technology, you will seldom have a clear roadmap or blueprint to build the app according to your vision.
That is why it is said that it is crucial to have an open mindset and follow a collaborative attitude so that you find an easy solution together if and when a particular thing does not work in your favor or as planned by you.
This will surely give you the confidence and make you believe that everyone involved in the development of the project has given their maximum to bring a positive result.
You will know that the platform will be useful for the debtors and the creditors alike.
Remember, in a blockchain based debt ecosystem privacy is paramount therefore it is required to also focus on the identity management aspect while designing and developing the project.
Also, ensure that there is a secure dashboard that contains all the relevant data and information including the liabilities and incomes of the debtors to view.
This will help them to keep a better track of their money and accordingly create a far more useful and productive financial plan.
They will also be able to make their payments accordingly on time so that they do not default at any point of time and cannot come out of their debt.
The best way to ensure that the privacy of the users is maintained is to provide minimal data to the third parties.
As an element of the proof of concept the external parties will be able to carry out proper identification and verification and decide whether or not to include the claim of a debtor in the system.
The new insight and concept will help the third parties in making the right collection decisions.
This means that they will be able to avoid the money spent on expensive collection processes where the chances existing for recovery or success is very little.
The blockchain technology helps in debt control and the proof of concept benefits the debt relief efforts in a lot of ways.
The level of benefits offered may be different depending on the users as well as the design of the system.
For example, the benefits offered to the debtors include and are not limited to:
- Better insight
- Better debt control over incomes and expenditures and
- Customized debt control and counseling.
As for the debt relief officers, the benefits offered are:
- Better coaching
- Less bureaucracy and
- No needless legal expenses.
And, as for the creditors, the blockchain based debt control system will offer benefits which include:
- Lower amount of defaulters
- Lower administrative costs
- Increased debt collection nest egg and
- Capability to execute civil duties to the consumers.
The integration of proof of concept to the blockchain ecosystem is therefore an approach that is beneficial for all involved in a debt process.
And, this concept and practice is bound to evolve down the years and will provide more benefits in the process, irrespective of the number of parties involved.
Typically, when the consumers have a better insight about their finances and debts they will find it easier to make the right financial decisions and avoid taking on new debts unnecessarily.
Therefore, it will not be surprising if and when this proof of concept on a blockchain ecosystem finds a much wider national applicability.
Typically, the consumers will be allowed to take on a debt only when the situations allow, especially their financial situations.
The blockchain application will provide them with an insight of their periodic earnings, almost due or overdue receivables, and other income sources along with their current and future expenditure.
All these will greatly help them to enhance their payment discipline resulting in a lower burden of debt and allowing them to focus more on responsible and financially sound behavior.
Help to the Debt Relief Ecosystem
As said earlier, the major reason for debt is lack of proper financial knowledge.
When blockchain technology is used in a debt relief ecosystem it will help the consumers in a lot of different ways such as:
- It will help them to regain control over their expenses
- It will help them to track their money and know their financial health and
- It will help them in repaying the debts on time and avoid incurring penalties due to defaults.
It is only when the people are taught about responsible and sound financial behavior that will save them from all these financial hassles.
Therefore, with the help of a blockchain solution it will be easier for the consumers as well as the creditors to establish and improve mutual coordination.
This will improve the relationship between the parties involved in a debt activity.
Undoubtedly, it is more important and beneficial to exchange information in real time rather than spending a lot of time updating earnings, expenses, and creating outlines of late payments.
This will help the debtors to have a better insight and knowledge about their current financial conditions.
From the point of view of the creditors this will save them from spending time and money unnecessarily on receivables that have very low or no possibilities of collection.
When smart technology is collaborated with customer services it will not only help in offering better packages but will also help significantly in improving customer services operations.
This is because blockchain is a cutting-edge technology that is known to open up new possibilities and increase the level of trust and transparency among the susceptible groups.
This technology also has the ability to let the users face and overcome the innovative challenges that are common in this ecosystem.
Therefore, it is not surprising that blockchain technology has become a buzzword in the financial ecosystem.
This technology works perfectly in those specific environments where a small amount of information is exchanged between several parties.
It offers the most reliable way to exchange information within the similar ecosystem and at the same time it ensures that the privacy of each of the parties will be maintained, permanently.
Therefore, the debt relief ecosystem will benefit greatly when blockchain technology is used to refine the idea of debt disbursal and collection with the help of a fully functional and useful proof of concept.
Since the system will ensure joint analysis it will offer a much better debt solution allowing consumers to access the services with minimal verification and identification.
Along with it, the system will also ensure optimum privacy by storing transactions where there is no personal information stored.
When any external party needs to access the info for verification or identification, they can do so only by fulfilling the set of requirements that are predetermined.
These external parties can use the standardized link to check the legitimacy of a customer.
With such sophisticated systems and technology involved in debt disbursal and collection, it will help the creditors a lot, especially the housing corporations and the health insurance companies that spend a lot of money on debt collection processes that are hopeless right from the outset.
Therefore, there is no doubt that proof of concept using blockchain technology is a more feasible approach in debt relief.
With the advent and use of the innovative blockchain technology, now, it is not only easier and faster to lend or borrow, but, just as it is pointed out in this article, blockchain technology helps in credit risk assessment and debt control as well.